GST on Small Traders: What Karnataka Protest Reveals
Over 65,000 small traders across Karnataka—running bakeries, tea shops, condiments stores, and petty stalls—are gearing up for a statewide bandh on July 25, 2025. The trigger? GST demand notices based on digital payment data allegedly showing turnovers beyond the ₹40 lakh threshold for mandatory GST registration.
This protest has sparked a serious debate: Is GST enforcement crushing genuine small businesses?
Let’s break it down.
Why Are Small Traders Protesting?
Traders allege that the Karnataka Commercial Tax Department has issued excessive tax demands, in some cases amounting to ₹30–40 lakh—even for businesses with marginal profits and limited physical assets.
The demands are largely based on:
- UPI and bank transaction data (FY 2021–22 to FY 2024–25)
- Receipts exceeding ₹40 lakh (GST threshold for registration)
- Presumption of unregistered taxable supply
But small traders argue:
- Exempt goods (like milk) were not excluded from turnover
- Some payments were collected on behalf of multiple branches or relatives
- Composition scheme eligibility wasn’t considered
- No prior show-cause or personal hearing was granted
Expert View:
“Digital receipts alone don’t always reflect taxable turnover. Under GST, only aggregate turnover for taxable supplies matters—after adjusting for exemptions,” says CA Harish Menon, Bengaluru-based GST advisor.
What Is the GST Registration Threshold?
As per Section 22 of the CGST Act, a supplier is liable for GST registration if:
- Aggregate turnover exceeds ₹40 lakh (goods) or ₹20 lakh (services) in a financial year.
- Turnover includes all supplies, including exempt and interstate ones.
However:
- Milk, bread, eggs, unbranded food etc. are exempt goods
- Cash payments, if not deposited, may not reflect in bank statements
- Multiple shops run by family members may not be clubbed legally unless proven
This is where the ambiguity lies—digital trails don’t always equal GST liability.
Are GST Notices Legal?
Yes—but only if due process is followed.
Under Section 61 of CGST Act:
- Authorities can scrutinise returns or third-party data
- If discrepancy is found, notice under Rule 99 should be issued
- A reasonable opportunity to respond must be given before passing a demand
If notices were issued without proper adjudication or assumptions were made without hearing the taxpayer, the actions can be challenged under:
- Article 14 (Equality before law) of the Constitution
- HC judgments including Shree Mahalaxmi Vastra Bhandar v. State of MP (MP HC, 2022), which held that arbitrary tax demands violate natural justice
What Should Small Traders Do?
Here’s a 5-step action plan if you receive a GST notice:
- Don’t ignore the notice – Non-response may lead to attachment of bank accounts.
- Download the notice from GST portal and check the section invoked.
- Reconcile turnover – Include exempt supplies, cross-check bank vs actual sales.
- Prepare a response – Mention exemptions, composition eligibility, or wrong assumptions.
- Consult a GST expert or CA to file a reply with supporting documents.
If the department proceeds with a demand without a fair hearing, you can file a writ petition before High Court.
Key Differences: Legitimate GST Enforcement vs Overreach
| Basis | Genuine Enforcement | Questionable Overreach |
|---|---|---|
| Proper Section Invoked | Yes (e.g., Sec 61, Sec 73) | Often vague or bulk notices issued |
| Reasonable Hearing | Personal hearing granted | Blanket demands without clarification |
| Consideration of Exempt | Adjusted from turnover | Ignored or unreasonably assumed as taxable |
| UPI/Cash Distinction | Segregated and matched with invoices | Assumed all receipts as taxable |
The Digital Payment Dilemma
One unintended consequence is visible already—many small traders are now refusing UPI or QR payments, fearing retrospective tax scrutiny. This could undo years of progress in India’s cashless economy push post-2016.
CBDT and CBIC need to clarify:
- How UPI data should be interpreted
- How to segregate personal and business receipts
- What safeguards will prevent harassment of genuine small businesses
Government’s Stand
According to Vipul Bansal, Commissioner of Commercial Taxes, “Only those exceeding ₹40 lakh turnover and liable to GST have been sent notices. Those dealing in exempt goods or under composition scheme should clarify with evidence.”
While legally sound, the onus of proof is shifting unfairly onto small traders—many of whom lack documentation or professional support.
Conclusion: Balance Enforcement with Fairness
While tax compliance is critical, so is the livelihood of India’s smallest businesses. Using digital payment data without context, or pushing through aggressive enforcement without dialogue, creates more distrust than discipline.
The Karnataka bandh may be the beginning. Other states may soon see similar pushbacks unless both policy clarity and empathy are built into GST administration.
Need Help Responding to a GST Notice?
Efiletax offers expert GST support—from replying to notices, reconciling digital payments, to filing writs if required. Contact us today for a confidential consultation.
FAQs on GST Notices for Small Traders
1. I run a small tea shop and received a ₹25 lakh GST demand. What should I do?
Respond immediately. Check if the turnover includes exempt items like milk. Take professional help to draft your reply.
2. Does UPI receipt mean I must register under GST?
Not always. Only if aggregate turnover (including UPI, cash, and bank) exceeds ₹40 lakh and involves taxable supplies.
3. Can I still opt for composition scheme?
Yes, if eligible. File a declaration in FORM GST CMP-02 and pay at lower rates with limited compliance.
4. Can I refuse digital payments now to avoid scrutiny?
Legally yes, but it may reduce your customer base. Instead, keep clean records and proper billing to stay compliant.
Summary
Karnataka traders plan bandh over GST notices based on UPI data. Learn GST rules for small traders, notice response steps, and how to protect your business.